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<p align="left"><font face="Arial"><strong><small>About The Author:<br>
<br>
</small></strong><span lang="X-NONE" style="color: black"><font size="2">
ROGER FELDMAN, Co-Chair of Andrews Kurth LLP Climate Change and Carbon
Markets Group has practiced law related to the finance of environmental and
energy projects and companies for 40 years. In particular, he has analyzed
and executed a wide variety and substantial value of project financings. He
chairs the American Bar Association’s Committee on Carbon Trading and
Finance, serves on the Board of the American Council for Renewable Energy,
and has been a senior official in the Federal Energy Administration. He is
a graduate of Brown University, Yale Law School and Harvard Business School.</font></span></font></p>
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<td width="75%" valign="top"><img src="../images/feldman.gif" alt="Washington Viewpoint by Roger Feldman" border="0" WIDTH="375" HEIGHT="75"><p><b><u>November 1998</u><br>
</b></p>
<b><font FACE="Palatino" SIZE="5"><p></font><font face="Arial" size="6">MERCHANT CHAMPION</font></b></p>
<p><strong>by Roger Feldman -- Bingham, Dana and Gould, P.C.<br>
</strong><font face="Arial" size="2">(<em>originally published by PMA OnLine Magazine:
11/98</em>)</font></p>
<p><font FACE="Palatino" SIZE="2"> </p>
</font><p> <font FACE="Palatino" SIZE="2"></p>
<p ALIGN="JUSTIFY"></font><font face="Arial">The feasibility of merchant plant development
and the attractiveness of redeveloping existing utility sites which have been acquired are
impacted significantly by the rules governing transmission access and responsibility for
the cost of transmission upgrade. The rules will be set in different governance
environments, e.g. ISO vs. transco. Different sets of rules may be established by
different governing mechanisms. In such variety may lie confusion and investment
impedance. There needs to be what the reinvention of government folks call a
"champion" of regulatory coherence.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">New England, characterized by a tight powerpool,
significant asset divestiture, and a constrained market likely to be characterized by
substitution of efficient new capacity for old capacity – has been a leading test
case of how well deregulation will work. The significance of FERC’s recent decisions
in the Champion International case (EL 98-69-000) and its accompanying Order with respect
to the New England Powerpool ("NEPOOL") (ER 98-3853-000) thus is not only its
major contribution to the rationalization of that market, but also its precedential
character for transactional developments under other forms of system governance in other
regions. In effect the process of developing a "case law" under Order 888 for
transmission access management is begun.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">It’s absolutely necessary. New England rules,
for example, were effectively bottlenecking real new merchant plant applications behind
ones which existed only on paper. NEPOOL was, in effect, tipping the balance in favor of
companies acquiring existing generation and against developers of new capacity that needed
access. Not surprising, given the new T&D emphasis of its traditional utility members.
Other regions will have analogous competitive problems, reflected in the specific rules
which their powerpools adopt. Following are some extrapolations of the new FERC decisions
as they may relate to future project development throughout the country.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">- The System Impact Study ("SIS")
procedures were predicated on NEPOOL’s "full integration requirement"; a
new generator’s request for capacity was to be considered to have an "adverse
impact" on the NEPOOL system in any instance where an existing generator had a
consequent reduced ability of any amount to serve load anywhere on the NEPOOL Grid for any
amount of time. Another key assumption in the SIS was that all existing generators on the
NEPOOL system would never be displaced, and that while existing generation could be
redispatched in lieu of adding system capacity, this was not permitted to be the case for
existing generation. FERC struck down as unrealistic the notion that prospective new
generation would only serve new load. It removed requirements to interconnection related
to local service, when all that was intended and required for particular new generators
was access to Pool Transmission Facilities ("PTFs").</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">This NEPOOL principle that each planned generator
must be guaranteed an exclusive and unconstrained firm transmission path to reach every
load serving entity in the system similarly was rejected, and its consequence –
system oversizing – was highlighted by FERC. So too was the NEPOOL’s correlative
notion that interconnection studies might be completed, but no interconnection could be
implemented physically, until a new congestion management system was put in place.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Under FERC’s new formulation, analysis is
limited to examination of reliability, stability and operating conditions. There will be
no delays in implementation. While the specific queuing procedure of NEPOOL was not
addressed by FERC at this time, the operative pressures of the former NEPOOL program are
reduced significantly by the FERC approach.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Consequently, as a general matter, it may be
expected that in the future ISO or Transco rules which can be shown to not correspond to
operational realities, or to have been structured to constrain timely new entrants, will
be subject to rigorous and skeptical FERC examination.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Pending receipt of the NEPOOL Congestion Management
System, FERC has shied away from the decision whether merchant generators should pay
rolled in or incremental costs for necessary additional transmission. Two observations by
FERC are, however, encouraging in this regard. First, that new generators should have the
option of paying redispatch costs in lieu of expansion costs, consistent with the FERC pro
forma tariff. Second, that it is important that the NEPOOL rules’ siting incentives
mesh with the incentives to be provided by the congestion management plan, i.e. the
expansion cost pricing and congestion pricing proposals need to be considered together.
Several other important aspects to the FERC Order are also supportive of merchant project
development.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">As a general matter, therefore, it may be expected
that when FERC reviews pricing rules in the future it will be in a manner to take into
account their ramifications for future competitive generation. </font></p>
<p ALIGN="JUSTIFY"><font face="Arial">While the FERC Opinion is notable for its
pragmatism, it is notable too for the extent to which it leaves flexible discretionary
administrative powers in the entities which emerge to govern different regions.
Transmission pricing approaches, for example, apparently may assume different forms
depending on different approaches taken by these bodies, to congestion pricing. Congestion
pricing likely will reflect the characteristics of the regional transmission system. The
significance of transmission costs consequently likely will vary among regions. In effect,
even were open access pricing to be mandated Federally, there would still be issues as to
the pricing of merchant generation sold in different parts of the country. </font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Since merchant generation ultimately is the key to
competition, it seems reasonable to suggest that FERC should not treat transmission with
such unlimited flexibility. Hold the loving sighs over Champion. The well deserved welcome
which private power has extended to FERC’s recent decision should not be construed to
mean that the agency has become the champion of merchant power in all respects, and indeed
that unwittingly it could deter its progress.</font></p>
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<p class="MsoBodyText" align="left" style="margin-bottom:0in;margin-bottom:.0001pt;
text-align:left"><font face="Arial" size="2">
<span lang="X-NONE" style="color: black">ROGER FELDMAN, Co-Chair of Andrews
Kurth LLP Climate Change and Carbon Markets Group has practiced law related
to the finance of environmental and energy projects and companies for 40
years. In particular, he has analyzed and executed a wide variety and
substantial value of project financings. He chairs the American Bar
Association’s Committee on Carbon Trading and Finance, serves on the Board
of the American Council for Renewable Energy, and has been a senior official
in the Federal Energy Administration. He is a graduate of Brown University,
Yale Law School and Harvard Business School.</span></font></p>
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